Organizational dynamics and innovation

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directional distribution, this proves difficult under complex distribution. When the manufacturing profit center overuse diagnostic indicators to control long-linked reciprocal interdependencies, it removes the incentive to focus on the softer long-term value creating elements – like a customer orientated culture (Gebauer et al., 2010; Henri 2006; Simons, 1995).

This is exactly the focus of property rights theory (Grossman and Hart, 1986; Hart and Moore, 1990) where non-contractibility of difficult to observe effort and incentives (Holmström and Tirole, 1991) caution against. Hence, soft guidance systems take increasing importance as instruments to facilitate the control and coordination of organizational interdependencies, where initiative, idiosyncratic resources, and effort is important (Henri, 2006; Liberti, 2020; Simons, 1991, 1995).

In short, delegation of responsibility and authority seeks to lever specific resources and capabilities. This must be collocated to reach delegate targets. To achieve this, different specific organizational structures are selected. It becomes visible when coordination is based on standardization and planning performed by manufacturing with various diagnostic indicators attached for efficiency purposes. The authority to implement diagnostic indicators, like budgets and subsequent control measures, is a way for manufacturing and its managers to establish and preserve authority. It also gains the right to decide on actions of agents in other business entities along the value chain. The application of additional guidance systems can find traction within the organization if they create value for both upstream and downstream business centers, and are not overshadowed by a focus on easy to measure diagnostic performance indicators. This can entail decisions about where and how to compete in terms of product features and market segments, in addition to what resources and capabilities to engage in the business centers that lie upstream from the final market (Eccles, 1985; Teece, 1982).

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firm started, developed its capabilities, gained early success, and learned lessons. It is also from where new activities along the value chain were extended to support its growth (Galbraith, 1983). The center of gravity reveals the firm’s path-dependent trajectory and its organizational culture (Teece et al., 1997) illustrating that an organization has a driving force along. The center of gravity influences how the organization processes information flows and the headquarters’

requirement for control and coordination of corporate activities. The center of gravity also affects how the firm configures and develops resources, capabilities, and competences (Nooteboom, 2004; Teece, 2010).

Galbraith (1983) argues that firms with an upstream center of gravity location have several distinct observable characteristics. They are usually capital-heavy with top management dominated by engineers who made their career from the upstream operating core of the firm with the processes and practices required to operate this organizational technology (Nooteboom, 2004; Teece et al, 1997). An upstream manufacturing organization will look for predictability to achieve economic efficiency from low-cost production; this is where coordination and incentives are embedded in standardized processes and production planning (Thompson, 1967).

Product innovation tends to be driven from the technical capabilities residing among engineers inside the upstream manufacturing with low receptiveness to market driven requirements in the forward part of the organization (Galbraith, 1983). A center of gravity located forward and closer to the final markets where the firm has integrated backward into manufacturing makes it easier to consider downstream inputs from the final product markets (Galbraith, 1983; Teece, 1982). Hence, when manufacturing firms integrate forward, it is important to recognize how the center of gravity influences the coordination of interdependencies between sequential business activities, and ultimately affects firms’ competitive situation (Ilinitch and Zeithaml, 1995).

When a manufacturing firm is supplied by integrated cost centers with limited knowledge about the complexity of the final product and value offering (Gereffi et al., 2005, 2018;

Lightfoot et al., 2013), the central role of the manufacturing center of gravity is not challenged.

The final product market in the chain of business activities essentially remains the same. When a manufacturing firm integrates forward into distribution, it assumes that value from entrepreneurial activities is created in the manufacturing business, which further cements the central role of the center of gravity. Forward integration under directional distribution does not fundamentally change the manufacturer’s business model and subsequent value offering (Teece,

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2010; Visnjic et al. 2016). The primary goal of integrated distribution functions is to support and seal off the instrumental and economic efficiencies from outside market influences by ensuring the sales flow (Thompson, 1967). This is done by delegating clear targets, process descriptions, and investment requirements that can be observed and measured to monitor agent effort. It will also minimize moral hazard (Anderson and Schmittlein, 1984; Lafontaine and Slade, 2007).

However, maintaining the efficiency of an upstream manufacturing center of gravity also carries inertia in the engagement of human resources along the value chain. Resources outside the manufacturing profit center – located inside the distribution functions – will then not be engaged in innovation and open learning between the distribution and manufacturing activities.

Human resources in directional distribution are essentially hired for exploitation (March, 1991;

Nooteboom, 2004) to achieve codified measurable targets set by the upstream center of gravity.

This will make the distribution functions very push oriented with a focus on achieving measurable results like sales volume, market share, revenues, and process efficiencies measured by diagnostic control systems. Hiring employees with competences confined to elevate process efficiencies does not encourage organizational learning, nor the ability to deal with product market complexity. It does little to challenge the inertia of the center of gravity (Bustinza et al., 2014; Lightfoot et al., 2013; Teece, 2010; Visnjic et al., 2016). The preservation of an upstream manufacturing center of gravity is reinforced when the business center takes on the formal role of a profit center, which allows it to use both formal and real authority to direct downstream activities and extract profits.

In contrast, a downstream center of gravity around distribution is focused on market segmentation and product innovation through an understanding of end-user needs. This is where prices are set in accordance with the perceived customer value (Baines and Lightfoot, 2014;

Galbraith, 1983). The higher reliance on specialized knowledge that is embedded in downstream human resources has implications for the ability to deal with the complexity of the product market offerings (Galbraith, 1983; Gebauer et al., 2005; Oliva and Kallenberg, 2003; Story et al., 2017). Under complex distribution, the center of gravity location presents different challenges to integrate the business activities along the value chain. Hence, an upstream center of gravity in a complex distribution environment essentially places the existing capabilities and resources further away from the dynamic product markets (Teece, 1982). This closed efficiency oriented manufacturing system is challenged, because competitiveness in dynamic product

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markets relies on the joint efforts from human resources in both the upstream and downstream business centers.

Under complex distribution, coordination of interdependencies between manufacturing and distribution is particular challenging for a manufacturing center of gravity, when it entails both tangible product features and intangible business model innovation (Baines and Lightfoot, 2014;

Bustinza et al., 2015; Gebauer et al., 2010; Teece, 2010). Coordination is here pursued through standardization and planning by the upstream manufacturing center of gravity center and will eventually dilute the competitiveness of the final products. This is because the upstream manufacturer does not have the tacit and specific knowledge about the downstream product complexity, and dynamic market changes under complex distribution. Even if the integrated forward distribution center has the status as a profit center, it faces the risk of being turned into a pseudo profit center if authority is maintained by an upstream manufacturing center of gravity.

Delegating authority is therefore needed from the center of gravity to accommodate an ability to respond to exogenous changes in forward markets. This will require structural changes that move authority to the distribution functions where the market knowledge is located (March, 1991; Nooteboom, 2004; Teece, 2010), thereby relocating or balancing the power of the manufacturing towards the distribution.

Manufacturing firms that acknowledge the importance of efforts in the downstream distribution centers may install administrative processes to facilitate coordination, imposing measures that incentivize engagement in value-creating initiatives. If distribution was organized as an independent legal entity before being acquired by a manufacturing firm, the market-related capabilities and knowledge (e.g., Peteraf and Barney, 2003; Grant, 1996; Kogut and Zander, 1992) would be prioritized and applied in entrepreneurial efforts to stay competitive. After the acquisition, the integrated company can use this knowledge for organizational learning in innovative initiatives that span across the vertically linked business activities to refine, upgrade, and invent technologies (Levinthal and March, 1981). Exploring for new knowledge (March, 1991) adds to the ‘know-how’ repertoire and can generate interactive capabilities (Nooteboom, 2004) between manufacturing and distribution (Lightfoot et al., 2013). This allows specific knowledge and capabilities to enrich the conventional center of gravity location to focus on innovative exploration for new product offerings with value-adding services (Kogut and Zander, 1992; Baines and Lightfoot, 2013).

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From the analysis above we learn the way an integrated firm perceives activities depends on the location of its organizational center of gravity. The early lessons learned influence path-dependency and what activities the integrated firm finds important for continued success – its priority investments along the value chain. It also influences the diversity of resources and capabilities along the value chain and for what purpose they are deployed. An upstream center of gravity will prioritize value adding activities departing inside the manufacturing; one that is usually capital heavy and use the distribution to achieve upstream goals. A downstream center of gravity is receptive to changes in final user market and will use information to influence manufacturing flexibility and product development. This also influence who has the authority to define governance systems, and for what purpose interdependency is coordinated. The ability for integrated firms to balance its center of gravity in response to exogenous changes in the product markets for end-users is important to stay competitive.